Silvercorp Goes on the Offensive

I’m writing from China, where I’m attending Silvercorp Metals’ (SVM)
mine tour with other analysts and reporters. We met with company
principals the first morning, including CEO and Explorer’s League
honoree Rui Feng at their downtown Beijing offices, where the bulk of
the discussion centered around a point-by-point rebuttal of the charges
made by the now-infamous short sellers. With a reporter’s camera
snapping, it became apparent to me that Rui and company have shifted
from playing defense to going on the offensive.

“We have eight
attorneys now,” Rui explained. “We’re going after these guys.” He
admitted that fighting the allegations is getting 100% of his focus
right now, something that might be concerning under normal
circumstances, but he’s bound and determined to assure shareholders that
their investment is sound.

In addition to the lawsuit against
some of the short sellers announced last Friday, SVM has hired
well-known forensics accounting firm KPMG to audit the company’s books.
They’ll be reviewing every scrap of paper, from bank statements to tax
receipts, to make their own determination on the soundness of SVM’s
finances. A report is expected in about two weeks, and other than seeing
ore with our own two eyes, this will arguably be one of the most
important steps in fighting the allegations.

Securities regulators
are also on the offensive. Not only are they conducting their own
investigation into the source of the accusations, other Chinese
companies previously targeted by the short sellers are pooling their
resources with regulators and SVM. While we don’t know that they’re all
innocent, a number have taken aggressive countermeasures; some have been
so successful that their stocks have rebounded dramatically.

The
tour has been more thorough and transparent than even I expected. We’ve
been privy to internal company documents, one of which is a daily
tonnage report – something Rui sees every morning. It’s abundantly clear
that if operations were exaggerated, it would have to be quite an
elaborate hoax. We met with officials from two smelters the company
uses, easily seeing that the grades they report match what SVM has
documented. We met with the company’s principal accountant in China; a
random review of one day’s tax receipts and the SVM’s internal
spreadsheet show the numbers match. We also met with four officials from
the National Tax Bureau, who informed us in no uncertain terms that
SVM’s subsidiaries have generated substantial revenue to the local
county. “We welcome any scrutiny,” they added.

I also asked many
parties what they thought of the allegations. “They don’t know what we
know,” said the deputy general manager at the Ying mine. “They can sell
the shares if they want, but we will buy them.” The county tax officials
informed us they were never contacted by any party regarding revenue or
tax receipts. “The allegations are simply not true,” we heard through
an interpreter. I asked an official at one of the smelters we visited
what he thought of the allegations; he laughed. We had dinner with four
local government officials, with the interpreter telling us the mayor
was “pissed off” at the short sellers. And what about the workers
themselves? “Many are angry,” Rui told us. “And some just laugh at the
accusations.”

But perhaps the most important aspect of the trip
and of determining if there is any truth to the accusations is the ore.
We saw the parade of trucks drive by us, watched the weighing process,
randomly leafed through stacks of records documenting the ore that’s
passed through the gates, witnessed the ore being transported by boat
and rail cart, looked on in amazement at the new 2,000-tonne-per-day
mill in full operation, and observed piles of finished product waiting
to be shipped to the refineries. And yes, we toured the Ying mine itself
and saw with our own eyes those sparkling veins full of high-grade
silver. I’ve got pictures of all this, and I didn’t hide behind any
trees to get them.

We have a lot more on the agenda; by the time
you read this I’ll be on my way to meet with another tax office and tour
the GC and BYP mines. I’ll be filing a full report, complete with
pictures and recommendations, for International Speculator and BIG GOLD readers sometime next week. If you have a vested interest in this
stock, this is one report you won’t want to miss. I can tell you right
now it will contain not only a complete analysis of every aspect of the
company, but a very specific recommendation of when to buy.

In the
meantime, based on my extensive discussions with management; review of
reams of both internal and public documents; conversations with
government, tax, and refinery officials; interviews with workers and
supervisors; observations of plant operations; and putting my hands on
high-grade veins running throughout the Ying mine, I have a message for
the short sellers.

You’d better think about covering.

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